Market Failure

Edit 0 1 …

October 31: Negative and positive exernalities (Syllabus Section 1.4)





November 2: Government remedies for market failure (Syllabus Section 1.4)


  • Homework Due: Read Mankiw (Chapter 10 - Public Policies Toward Externalities and Private Solutions To Externalities sections)

  • Assessments and Activities: Free-response/problem and lecture

    • Free-response/problem: You will work cooperatively with your partner to construct a response to the following prompt.

      • Greater consumption of alcohol leads to more motor vehicle accidents and, thus, imposes costs on people who do not drink and drive.
          • Illustrate the market for alcohol, identifying the market equilibrium level of output and the socially optimal (efficient) level of output.
          • On your graph, shade the area corresponding to the deadweight loss. Explain.
    • Lecture: Government remedies and market failure (PDF below)


November 9: Public goods and common resources (Syllabus Section 1.4)



  • Assessments and Activities: Free-response/problem and lecture

    • Free-response/problem: You will work cooperatively with your partner to construct a response to the following prompt.

      • Suppose the government decides to issue tradable permits for a certain form of pollution.
        • Does it matter for economic efficiency whether the government distributes or auctions the permits?
        • If the government chooses to distrtibute the permits, does the allocation of permits among firms matter for efficiency?
    • Lecture: Public goods and common resources (PDF below)



November 13: Asymmetric information (Syllabus Section 1.4)


  • Homework Due: Read Mankiw (Chapter 22 - Asymmetric Information section)

  • Assessments and Activities: Free-response/problem and lecture

    • Free-response/problem: You will work cooperatively with your partner to construct a response to the following prompt.

      • Both public goods and common resources involve externalities
        1. Are the externalities associated with public goods generally positive or negative? Use examples in your answer. Is the quantity of public goods supplied by the free market greater than or less than the socially efficient quantity?
        2. Are the externalities associated with common resrources generally positive or negative? Use examples in your answer. Is the use of common resources in a free market socially efficient?
    • Lecture:Asymmetric Information (PDF below)


November 15: Linear demand and supply functions and externalities


  • Class Activity: More practice using linear supply and demand functions.

November 20: Test on market failure